One week ago, we and many others wondered, if the time has finally come for Venezuela, which was facing a “no grace period” $842 million principal payment for bonds issued by state-run energy company PDVSA, to default on its billions of unrepayable obligations. As we reported then, the liquidity crisis for Venezuela was especially acute because even if it did make the first PDVSA payment, it was facing a second, even larger one today, when PDVSA had to make another $1.121BN payment.
Well, despite a several day transfer delay, Venezuela did make the first payment, however it was not clear if Caracas would also make today’s payment, although as Reuters reported earlier, “markets remained optimistic that President Nicolas Maduro’s government will make the payment, though investors expect delays. PDVSA last week struggled for days to deliver funds for a separate bond payment amid confusion over which banks were charged with transferring the money.”
PDVSA bonds were down slightly in early trading on Thursday, while Venezuelan bonds were mixed, according to Thomson Reuters data.
However, as we previewed again last week, and as Reuters confirmed today, “most economists say a default is increasingly likely in the medium term as Venezuela’s collapsing socialist economic model has left the once-prosperous population destitute and led to deterioration of the OPEC nation’s vital oil industry.”
It now appears that that is indeed the case, and the long overdue Venezuela default, which has been speculated ever since 2014, is finally nigh, because during a nationwide TV address, Venezuela’s socialist president Nicolas Maduro said the country will seek to restructure its global debt after the state-owned oil company makes the PDVSA payment due at midnight. Maduro blamed a financial blockade that is preventing the nation from rolling over its debt, according to Bloomberg.
“I decree a refinancing and restructuring of all foreign debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”
“We have had to face a real global financial persecution,” Maduro said, adding that OPEC member Venezuela had paid $71.7 billion in debt since he came to power in 2013, despite losing $100 billion in revenues to falling oil income. Too bad he didn’t blame the “speculators” for the collapse of his socialist paradise.
“If Venezuela wants to refinance one of its bonds, it is prohibited by the global financial dictatorship,” Maduro added according to Reuters, warning that “they will never suffocate us. We will never surrender to the U.S. empire,” he added, also criticizing Colombia for allegedly blocking a shipment of medicines under U.S. pressure.
The good news is that bondholders of the PDVSA bonds maturing Thursday will get paid in full: according to Maduro, the government will make the last $1.1 billion PDVSA principal payment due overnight. The bad news, is that everyone else is about to get a big, juicy haircut, or as Bloomberg reports, “from there on out, the nation will renegotiate its debt with banks and investors, he said in a national address.”
Of course, since there is no such thing as a “unilateral restructuring” in the world of debt, and since the country has effectively previewed it will be haircutting its creditors few if any of whom will agree to Maduro’s terms, another way of putting what Maduro just said is that Venezuela is – finally – about to default.
Now this is a problem for Venezuela’s creditors because, well, they are owed a lot of money. In total, Venezuela has $143 billion in foreign debt owed by the government and state entities, with about $52 billion in bonds, according to Torino Capital, even as Venezuela’s international reserves – including the nation’s gold – have sunk to just $10 billion, a 15 year low. The table below shows only the upcoming coupon and maturity payments:
What is bizarre is that unlike most of its Latin American neighbors, during 18 years of socialist rule, Venezuela has always paid its foreign debt on time, including during the recent crippling economic crisis that has spurred widespread food shortages. Or rather had.
Maduro made the announcement in a televised address in which he emphasized that Venezuela has always honored its obligations, and had the money to continue doing so, but was being hampered in its efforts by the financial penalties the U.S. imposed this year for what it said were anti-democratic moves by his administration.
He may have a point: In many ways the default was inevitable. Financial sanctions imposed by Donald Trump in August made it virtually impossible to raise money from many international investors, and led to a collapse in Venezuela oil exports. Those sanctions, which prohibit U.S.-regulated institutions form purchasing new bonds, will also limit the current regime from sitting down with U.S. investors to restructure its debt. It’s an unprecedented situation for bondholders, who have limited recourse to negotiate for payment as long as sanctions are in effect.
Vice President Tareck El Aissami – one of the individuals targeted in the sanctions – was named by Maduro as head of bond restructuring efforts. He will convene bondholders of all international debts owed by the sovereign and PDVSA. But wait, there’s more, because earlier this year, the Treasury Department alleged that the same El Aissami – who was elevated to vice president in January – protected drug lords and oversaw a network exporting thousands of kilograms of cocaine.
El Aissami spoke on TV, saying that the “refinancing”, by which he probably means default, will allo Venezuela to invest in social functions, and added that Euroclear has blocked Venezuela’s payments.
Meanwhile, as a long-awaited Venezuela default is now reality, there are those – including economists such as Ricardo Hausmann – who will be delighted by the country’s aggressive move to impair its creditors, having urged the government to stop payments on its bonds. They say the debt load is unsustainable, and sending dollars to foreign investors while cutting back on imports of food, medicine and basic goods for the Venezuelan people is immoral. In the hyperinflationary banana republic case of Venezuela, they just may have a point.
Venezuelan bonds trade at an average price of 36 cents on the dollar due to widespread investor concern that the nation was headed for default. Benchmark bonds due in 2027 have plunged from about 50 cents on the dollar a year ago to 38.7 on Thursday.
As for whether or not Venezuela is about to default, from a purely technical CDS and ISDA standpoint, any distressed restructuring of debt – which is what is about to take place – is equivalent to a credit event. Which means all those who loaded up on CDS in the past three years are about to have a long-overdue payday.
Finally, as Bloomberg adds, according to Wall Street analysts, “Tomorrow Will Be Ugly” for Venezuelan Bonds.
Ray Zucaro, chief investment officer at Miami-based RVX Asset Management, who holds Venezuelan debt, was quoted by Bloomberg as saying that President Nicolas Maduro’s announcement that Venezuela will seek to restructure its global debt means “tomorrow will be ugly for bondholders.” “It makes no sense,” adds Gorky Urquieta, who helps manage $15 billion in emerging-market debt at Neuberger Berman.
“There’s a bad scenario, which has essentially happened now, in which the regime defaults, there’s no change in regime and with the sanctions there’s no restructuring. Who knows how long Maduro survives, but it could take a while. The whole idea of recovery value takes on a whole new meaning and there’s not much bondholders will be able to do.”
“Clearly they’re saying they won’t pay as scheduled. Then they’ll say we can’t restructure because of sanctions. They’ll play this big time for their domestic audience.”
Vice President Tareck El Aissami being in charge of the restructuring “is a bad sign by itself,” says Geronimo Mansutti, head of finance at Caracas- based broker Rendivalores. “Will they pay the coupons that have been delayed? That’s my question right now. If they do, that would buy them the time to try to negotiate with creditors.”
Spoiler alert: they won’t pay the coupons, and as for the creditors’ negotiating leverage, well they have none – after all they are “negotiating” with a dictator.
Speaking of which, in retrospect one can remove the “technical” from “technical default.”